UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2023

☐ Transition report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to ______

Commission File Number: 000-23329

Charles & Colvard, Ltd.

(Exact name of registrant as specified in its charter)

North Carolina		56-1928817
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

170 Southport Drive Morrisville, North Carolina		27560
(Address of principal executive offices)		(Zip Code)

(919) 468-0399

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value per share	CTHR	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 6, 2023, there were 30,344,955 shares of the registrant’s common stock, no par value per share, outstanding.

CHARLES & COLVARD, LTD.

FORM 10-Q

For the Quarterly Period Ended September 30, 2023

TABLE OF CONTENTS

		Page Number
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and June 30, 2023	1
	Condensed Consolidated Statements of Operations (unaudited) for the three months ended September 30, 2023 and 2022	2
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the three months ended September 30, 2023 and 2022	3
	Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended September 30, 2023 and 2022	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 6.	Exhibits	32
	Signatures	33

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PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

CHARLES & COLVARD, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2023 (unaudited)			June 30, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	7,592,698		$	10,446,532
Restricted cash		5,079,322			5,122,379
Accounts receivable, net		442,693			380,085
Inventory, net		8,263,043			7,476,046
Note receivable		250,000			250,000
Prepaid expenses and other assets		969,440			901,354
Total current assets		22,597,196			24,576,396
Long-term assets:
Inventory, net		19,066,682			19,277,530
Property and equipment, net		2,534,713			2,491,569
Intangible assets, net		315,776			305,703
Operating lease right-of-use assets		2,028,736			2,183,232
Other assets		49,658			49,658
Total long-term assets		23,995,565			24,307,692
TOTAL ASSETS	$	46,592,761		$	48,884,088

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,652,218		$	4,786,155
Operating lease liabilities, current portion		886,117			880,126
Accrued expenses and other liabilities		925,385			1,395,479
Total current liabilities		7,463,720			7,061,760
Long-term liabilities:
Noncurrent operating lease liabilities		1,842,468			2,047,742
Total long-term liabilities		1,842,468			2,047,742
Total liabilities		9,306,188			9,109,502
Commitments and contingencies (Note 9)
Shareholders’ equity:
Common stock, no par value; 50,000,000 shares authorized; 30,912,108 shares issued and 30,523,705 shares outstanding at September 30, 2023 and 30,912,108 shares issued and 30,523,705 shares outstanding at June 30, 2023		57,242,211			57,242,211
Additional paid-in capital		26,257,363			26,205,919
Treasury stock, at cost, 388,403 shares at both September 30, 2023 and June 30, 2023		(489,979	)		(489,979	)
Accumulated deficit		(45,723,022	)		(43,183,565	)
Total shareholders’ equity		37,286,573			39,774,586
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	46,592,761		$	48,884,088

See Notes to Condensed Consolidated Financial Statements.

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CHARLES & COLVARD, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended September 30,
	2023			2022
Net sales	$	4,953,023		$	7,374,083
Costs and expenses:
Cost of goods sold		3,008,507			4,086,010
Sales and marketing		2,721,965			3,107,946
General and administrative		1,854,268			1,413,476
Total costs and expenses		7,584,740			8,607,432
Loss from operations		(2,631,717	)		(1,233,349	)
Other income:
Interest income		92,260			40,201
Total other income		92,260			40,201
Loss before income taxes		(2,539,457	)		(1,193,148	)
Income tax benefit		-			(302,956	)
Net loss	$	(2,539,457	)	$	(890,192	)

Net loss per common share:
Basic	$	(0.08	)	$	(0.03	)
Diluted	$	(0.08	)	$	(0.03	)

Weighted average number of shares used in computing net loss per common share:
Basic		30,444,954			30,433,195
Diluted		30,444,954			30,433,195

See Notes to Condensed Consolidated Financial Statements.

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CHARLES & COLVARD, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

	Three Months Ended September 30, 2023
	Common Stock
	Number of Outstanding Shares		Amount		Additional Paid-in Capital		Treasury Stock			Accumulated Deficit			Total Shareholders’ Equity
Balance at June 30, 2023		30,523,705	$	57,242,211	$	26,205,919	$	(489,979	)	$	(43,183,565	)	$	39,774,586
Stock-based compensation		-		-		51,444		-			-			51,444
Net loss		-		-		-		-			(2,539,457	)		(2,539,457	)
Balance at September 30, 2023		30,523,705		57,242,211		26,257,363		(489,979	)		(45,723,022	)		37,286,573

	Three Months Ended September 30, 2022
	Common Stock
	Number of Outstanding Shares			Amount		Additional Paid-in Capital		Treasury Stock			Accumulated Deficit			Total Shareholders’ Equity
Balance at June 30, 2022		30,747,759		$	57,242,211	$	25,956,491	$	(38,164	)	$	(23,602,771	)	$	59,557,767
Stock-based compensation		-			-		96,232		-			-			96,232
Cancellation of restricted stock		(44,688	)		-		-		-			-			-
Repurchases of common stock		(358,116	)		-		-		(451,815	)		-			(451,815	)
Net loss		-			-		-		-			(890,192	)		(890,192	)
Balance at September 30, 2022		30,344,955		$	57,242,211	$	26,052,723	$	(489,979	)	$	(24,492,963	)	$	58,311,992

See Notes to Condensed Consolidated Financial Statements.

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CHARLES & COLVARD, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended September 30,
	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,539,457	)	$	(890,192	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		178,291			137,711
Stock-based compensation		51,444			96,232
Provision for uncollectible accounts		79,000			-
Recovery of sales returns		(81,000	)		(36,000	)
Inventory write-downs		-			119,000
Provision for accounts receivable discounts		9,996			3,250
Deferred income taxes		-			(302,956	)
Changes in operating assets and liabilities:
Accounts receivable		(70,604	)		695,165
Inventory		(576,149	)		(3,174,668	)
Prepaid expenses and other assets, net		86,410			(36,616	)
Accounts payable		866,063			316,819
Accrued expenses and other liabilities		(669,377	)		(598,883	)
Net cash used in operating activities		(2,665,383	)		(3,671,138	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(217,052	)		(430,400	)
Payments for intangible assets		(14,456	)		(2,214	)
Net cash used in investing activities		(231,508	)		(432,614	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock		-			(451,815	)
Net cash used in financing activities		-			(451,815	)

NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH		(2,896,891	)		(4,555,567	)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD		15,568,911			21,179,340
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD	$	12,672,020		$	16,623,773

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	-		$	5,900

See Notes to Condensed Consolidated Financial Statements.

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CHARLES & COLVARD, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.	DESCRIPTION OF BUSINESS

Charles & Colvard, Ltd. (the “Company”), a North Carolina corporation, was founded in 1995. The Company manufactures, markets, and distributes Charles & Colvard Created Moissanite^® (hereinafter referred to as moissanite or moissanite jewels) and finished jewelry featuring moissanite, including Forever One™, the Company’s premium moissanite gemstone brand, for sale in the worldwide fine jewelry market. The Company also markets and distributes Caydia^® lab grown diamonds and finished jewelry featuring lab grown diamonds for sale in the worldwide fine jewelry market.

The Company sells loose moissanite jewels, loose lab grown diamonds, and finished jewelry featuring both moissanite and lab grown diamonds at wholesale prices to distributors, manufacturers, retailers, and designers, including some of the largest distributors and jewelry manufacturers in the world. In addition, in May 2023, the Company launched charlesandcolvarddirect.com, a direct-to-wholesaler sales portal, which is a gemstone product disposition wholesale outlet. The Company’s finished jewelry and loose moissanite jewels and lab grown diamonds that are mounted into fine jewelry by other manufacturers are sold at retail outlets and via the Internet. The Company sells at retail prices to end-consumers through its own Charles & Colvard Signature Showroom, which opened in October 2022, and through its wholly-owned operating subsidiary, charlesandcolvard.com, LLC, third-party online marketplaces, drop-ship, and other pure-play, exclusively e-commerce outlets. The Company also sells at discount retail prices to end-consumers through moissaniteoutlet.com, LLC, a wholly-owned operating subsidiary of charlesandcolvard.com, LLC, and third-party online marketplaces.

2.	BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation – The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. However, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q include all normal and recurring adjustments necessary for the fair statement of the results for the interim periods presented. The results for the three months ended September 30, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2024.

The condensed consolidated financial statements as of September 30, 2023 and for the three months ended September 30, 2023 and 2022 included in this Quarterly Report on Form 10-Q are unaudited. The balance sheet as of June 30, 2023 is derived from the audited financial statements as of that date. The accompanying statements should be read in conjunction with the audited financial statements and related notes contained in Item 8 of the Company’s Annual Report on Form 10-K (the “2023 Annual Report”) for the fiscal year ended June 30, 2023 or Fiscal 2023 filed with the SEC on October 12, 2023.

The accompanying condensed consolidated financial statements as of September 30, 2023 and June 30, 2023 and for the three months ended September 30, 2023 and 2022, include the accounts of the Company and its wholly-owned subsidiaries charlesandcolvard.com, LLC, including its wholly-owned subsidiary, moissaniteoulet.com, LLC, which was formed and incorporated as of February 24, 2022; Charles & Colvard Direct, LLC; and Charles & Colvard (HK) Ltd., the Company’s Hong Kong subsidiary, which was entered into dormancy as of September 30, 2020 following its re-activation in December 2017. Charles & Colvard (HK) Ltd. previously became dormant in the second quarter of 2009 and has had no operating activity since 2008. Charles & Colvard Direct, LLC, had no operating activity during the three-month periods September 30, 2023 or 2022. All intercompany accounts have been eliminated.

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Significant Accounting Policies – In the opinion of the Company’s management, the Company’s significant accounting policies used for the three months ended September 30, 2023, are consistent with those used for the fiscal year ended June 30, 2023. Accordingly, please refer to Note 2 to the Consolidated Financial Statements in the 2023 Annual Report for the Company’s significant accounting policies.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. As future events and their effects cannot be fully determined with precision, actual results of operations, cash flow, and financial position could differ significantly from estimates. The most significant estimates impacting the Company’s consolidated financial statements relate to valuation and classification of inventories, accounts receivable reserves, stock-based compensation, and revenue recognition. Changes in estimates are reflected in the consolidated financial statements in the period in which the change in estimate occurs.

Restricted Cash – In accordance with the terms of the Company’s cash collateralized $5.00 million credit facility from JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), which expires by its terms on July 31, 2024, the Company is required to keep $5.1 million in a cash deposit account held by JPMorgan Chase. Such amount is held as security for the Company’s credit facility from JPMorgan Chase. Accordingly, this cash deposit held by JPMorgan Chase is classified as restricted cash for financial reporting purposes on the Company’s condensed consolidated balance sheets. For additional information regarding the Company’s cash collateralized credit facility, see Note 10, “Debt.”

The reconciliation of cash, cash equivalents, and restricted cash, as presented on the Condensed Consolidated Statements of Cash Flows, consist of the following as of the dates presented:

	September 30, 2023		June 30, 2023
Cash and cash equivalents	$	7,592,698	$	10,446,532
Restricted cash		5,079,322		5,122,379
Total cash, cash equivalents, and restricted cash	$	12,672,020	$	15,568,911

3.	SEGMENT INFORMATION AND GEOGRAPHIC DATA

The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making operating decisions and assessing performance as the source of the Company’s operating and reportable segments.

The Company manages its business through two operating and reportable segments based on its distribution channels to sell its product lines, loose jewels and finished jewelry: its “Online Channels” segment, which consists of e-commerce outlets including charlesandcolvard.com, moissaniteoutlet.com, third-party online marketplaces, drop-ship retail, and other pure-play, exclusively e-commerce outlets; and its “Traditional” segment, which consists of wholesale and retail customers, including its own Charles & Colvard Signature Showroom and charlesandcolvarddirect.com. The accounting policies of the Online Channels segment and Traditional segment are the same as those described in Note 2, “Basis of Presentation and Significant Accounting Policies” of this Quarterly Report on Form 10-Q and in the Notes to the Consolidated Financial Statements in the 2023 Annual Report.

The Company evaluates the financial performance of its segments based on net sales and product line gross profit, or the excess of product line sales over product line cost of goods sold. The Company’s product line cost of goods sold is defined as product cost of goods sold, excluding non-capitalized expenses from the Company’s manufacturing and production control departments, comprising personnel costs, depreciation, leases, utilities, and corporate overhead allocations; freight out; inventory write-downs; and other inventory adjustments, comprising costs of quality issues, and damaged goods.

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Summary financial information by reportable segment is as follows:

	Three Months Ended September 30, 2023
	Online Channels		Traditional		Total
Net sales
Finished jewelry	$	3,596,942	$	704,317	$	4,301,259
Loose jewels		319,744		332,020		651,764
Total	$	3,916,686	$	1,036,337	$	4,953,023

Product line cost of goods sold
Finished jewelry	$	1,575,600	$	383,567	$	1,959,167
Loose jewels		99,978		139,396		239,374
Total	$	1,675,578	$	522,963	$	2,198,541

Product line gross profit
Finished jewelry	$	2,021,342	$	320,750	$	2,342,092
Loose jewels		219,766		192,624		412,390
Total	$	2,241,108	$	513,374	$	2,754,482

Depreciation and amortization	$	48,758	$	129,533	$	178,291

Capital expenditures	$	120,145	$	96,907	$	217,052

	Three Months Ended September 30, 2022
	Online Channels		Traditional		Total
Net sales
Finished jewelry	$	4,403,589	$	1,136,817	$	5,540,406
Loose jewels		448,897		1,384,780		1,833,677
Total	$	4,852,486	$	2,521,597	$	7,374,083

Product line cost of goods sold
Finished jewelry	$	1,970,111	$	636,588	$	2,606,699
Loose jewels		162,699		662,924		825,623
Total	$	2,132,810	$	1,299,512	$	3,432,322

Product line gross profit
Finished jewelry	$	2,433,478	$	500,229	$	2,933,707
Loose jewels		286,198		721,856		1,008,054
Total	$	2,719,676	$	1,222,085	$	3,941,761

Depreciation and amortization	$	63,387	$	74,324	$	137,711

Capital expenditures	$	136,988	$	293,412	$	430,400

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The Company does not allocate any assets to the reportable segments, and, therefore, no asset information is reported to the chief operating decision maker or disclosed in the financial information for each segment.

A reconciliation of the Company’s product line cost of goods sold to cost of goods sold as reported in the condensed consolidated financial statements is as follows:

	Three Months Ended September 30,
	2023		2022
Product line cost of goods sold	$	2,198,541	$	3,432,322
Non-capitalized manufacturing and production control expenses		597,885		377,053
Freight out		204,216		275,737
Inventory write-downs		-		119,000
Other inventory adjustments		7,865		(118,102	)
Cost of goods sold	$	3,008,507	$	4,086,010

A reconciliation of the Company’s consolidated product line gross profit to the Company’s consolidated net loss before income taxes is as follows:

	Three Months Ended September 30,
	2023			2022
Product line gross profit	$	2,754,482		$	3,941,761
Non-allocated cost of goods sold		(809,966	)		(653,688	)
Sales and marketing		(2,721,965	)		(3,107,946	)
General and administrative		(1,854,268	)		(1,413,476	)
Total other income		92,260			40,201
Loss before income taxes	$	(2,539,457	)	$	(1,193,148	)

The Company recognizes sales by geographic area based on the country in which the customer is based. Sales to international end consumers made through the Company’s transactional websites, charlesandcolvard.com and moissaniteoutlet.com, are included in international sales for financial reporting purposes. A portion of the Company’s Traditional segment sales made to international wholesale distributors represents products sold internationally that may be re-imported to U.S. retailers.

The following presents net sales data by geographic area:

	Three Months Ended September 30,
	2023		2022
Net sales:
United States	$	4,768,910	$	7,095,373
International		184,113		278,710
Total	$	4,953,023	$	7,374,083

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4.	FAIR VALUE MEASUREMENTS

Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy consists of three levels based on the reliability of inputs, as follows:

Level 1. Quoted prices in active markets for identical assets and liabilities;

Level 2. Inputs other than Level 1 quoted prices that are directly or indirectly observable; and

Level 3. Unobservable inputs that are not corroborated by market data.

The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by management of the Company. The financial instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, notes receivable, trade accounts receivable, and trade accounts payable. All financial instruments are reflected in the condensed consolidated balance sheets at carrying value, which approximates fair value due to the nature of these financial instruments.

There were no assets measured at fair value on a non-recurring basis as of September 30, 2023 or June 30, 2023.

5.	INVENTORIES

The Company’s total inventories, net of reserves, consisted of the following as of the dates presented:

	September 30, 2023		June 30, 2023
Finished jewelry:
Raw materials	$	1,493,987	$	1,288,906
Work-in-process		1,147,154		1,223,670
Finished goods		13,546,994		12,772,611
Finished goods on consignment		2,199,128		2,039,506
Total finished jewelry	$	18,387,263	$	17,324,693
Loose jewels:
Raw materials	$	317,392	$	421,603
Work-in-process		5,712,141		6,131,853
Finished goods		2,338,373		2,294,270
Finished goods on consignment		260,998		254,323
Total loose jewels		8,628,904		9,102,049
Total supplies inventory		313,558		326,834
Total inventory	$	27,329,725	$	26,753,576

As of the dates presented, the Company’s total inventories, net of reserves, are classified as follows:

	September 30, 2023		June 30, 2023
Short-term portion	$	8,263,043	$	7,476,046
Long-term portion		19,066,682		19,277,530
Total	$	27,329,725	$	26,753,576

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The Company’s work-in-process inventories include raw SiC crystals on which processing costs, such as labor and sawing, have been incurred; and components, such as metal castings and finished goods set with moissanite jewels, that have been issued to jobs in the manufacture of finished jewelry. The Company’s moissanite jewel manufacturing process involves the production of intermediary shapes, called “preforms,” that vary depending upon the expected size and shape of the finished jewel. To maximize manufacturing efficiencies, preforms may be made in advance of current finished inventory needs but remain in work-in-process inventories. As of September 30, 2023 and June 30, 2023, work-in-process inventories issued to active production jobs approximated $1.80 million and $1.99 million, respectively.

The Company’s moissanite and lab grown diamond jewels do not degrade in quality over time and inventory generally consists of the shapes and sizes most commonly used in the jewelry industry. Product obsolescence is closely monitored and reviewed by management as of and for each financial reporting period.

The Company manufactures finished jewelry featuring moissanite and lab grown diamonds. Relative to loose moissanite jewels and lab grown diamonds, finished jewelry is more fashion-oriented and subject to styling trends that could render certain designs obsolete over time. The majority of the Company’s finished jewelry featuring moissanite and lab grown diamonds is held in inventory for resale and largely consists of such core designs as stud earrings, solitaire and three-stone rings, pendants, and bracelets that tend not to be subject to significant obsolescence risk due to their classic styling. In addition, the Company generally holds smaller quantities of designer-inspired and trend moissanite fashion jewelry that is available for resale through retail companies and through its Online Channels segment. The Company also carries a limited amount of inventory as part of its sample line that the Company uses in the selling process to its customers.

The Company’s continuing operating subsidiaries carry no net inventories, and inventory is transferred without intercompany markup from the parent entity as product line cost of goods sold when sold to the end consumer.

The Company’s inventories are stated at the lower of cost or net realizable value on an average cost basis. Each accounting period the Company evaluates the valuation and classification of inventories including the need for potential adjustments to inventory-related reserves, which include significant estimates by management, including the effect of market factors and sales trends. Changes to the Company’s inventory reserves and allowances are accounted for in the accounting period in which a change in such reserves and allowances is observed and deemed appropriate, including changes in management’s estimates used in the process to determine such reserves and valuation allowances.

6.	NOTE RECEIVABLE

On March 5, 2021, the Company entered into a $250,000 convertible promissory note agreement (the “Convertible Promissory Note”), with an unrelated third-party strategic marketing partner. The Convertible Promissory Note is unsecured and was scheduled originally to mature on March 5, 2022. In February 2022, the Company entered into an amendment to the Convertible Promissory Note that was effective as of December 9, 2021 and changed the maturity date to September 30, 2022. Effective September 26, 2022, the Company further amended the Convertible Promissory Note (the “September 2022 Amendment”) and changed the maturity date to June 20, 2024 (the “Maturity Date”).

Interest is accrued at a simple rate of 0.14% per annum and will continue to accrue until the Convertible Promissory Note is converted in accordance with the conversion privileges contained within the Convertible Promissory Note or is repaid. Principal outstanding during an event of default accrues interest at the rate of 5% per annum.

Subject to the borrower’s completion of a specified equity financing transaction (an “Equity Financing”) on or prior to the Maturity Date, the unpaid principal amount, including accrued and unpaid interest, automatically converts into equity units of the most senior class of equity securities issued to investors in the Equity Financing at the lesser of 80% of the per unit price of the units purchased by investors or the price equal to $33,500,000 divided by the aggregate number of outstanding units of the borrower immediately prior to the closing of the financing. Unless converted as provided in the Convertible Promissory Note, the principal amount, including accrued and unpaid interest, will, on the Maturity Date, at the Company’s option either (i) become due and payable to the Company, or (ii) convert into equity units at the specified conversion price in accordance with the terms of the Convertible Promissory Note.

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7.	ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities, current, consist of the following as of the dates presented:

	September 30, 2023		June 30, 2023
Deferred revenue	$	304,399	$	566,896
Accrued compensation and related benefits		241,124		382,630
Accrued sales taxes and franchise tax		144,434		202,091
Accrued cooperative advertising		235,427		243,861
Other accrued expenses		1		1
Total accrued expenses and other liabilities	$	925,385	$	1,395,479

8.	INCOME TAXES

For the three months ended September 30, 2023, the Company’s statutory tax rate was 22.94% and consisted of the federal income tax rate of 21.00% and a blended state income tax rate of 1.94%, net of the federal benefit. For the three months ended September 30, 2022, the Company’s statutory tax rate was 22.98% and consisted of the federal income tax rate of 21.00% and a blended state income tax rate of 1.98%, net of the federal benefit. For the three months ended September 30, 2023, the Company’s effective tax rate was zero. The Company’s effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in book and tax accounting arising primarily from the permanent tax benefits associated with stock-based compensation transactions during the accounting period then ended.

The Company recognized zero net income tax benefit for the quarter ended September 30, 2023, compared with a net income benefit of approximately $303,000 for the quarter ended September 30, 2022.

SEC Form 10-Q filed by Charles & Colvard Ltd